Management, The Controller, and Cost Accounting

Cost Accounting
Chapter 1
Management, the Controller, and Cost
Accounting
Learning Objectives
1. Model the management process as three interrelated activities:
planning, organizing, and control.
2. Identify and distinguish three kinds of plans: short-
range, long-range, and strategic.
3. Identify and differentiate the tasks in which management is
aided by information about costs and benefits.
4. Identify which of the management accountant’s ethical
responsibilities apply to a particular ethical issue.
5. State the role of the pronouncements of the Cost Standards
Board.
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whole or in part. 2
1-1 Management
• Management is composed of three groups
– operating management
– middle management
– executive management
whole or in part. 3
1-1 Management
• Planning
– The construction of a detailed operating program is the
process of sensing external opportunities and threats,
determining desirable objectives, and employing resources
to accomplish these objectives.
– Effective planning requires participation and coordination
of all parts of the entity.
– The companies best able to maximize profits are those that
produce goods or services at an excellent level of quality
and value, in a volume, at a time and place, at a cost, and at
a price that will win cooperation of employees, gain the
goodwill of customers, and meet social responsibilities.
whole or in part. 4
1-1 Management
• Planning
– Strategic plans
– Short-range plans
– Long-range plans
whole or in part. 5
1-1 Management
• Planning
– Strategic plans are formulated at the highest levels of
management, take the broadest view of the company and
its environment, are the least quantifiable, and are
formulated at irregular intervals by an essentially
unsystematic process that begins with identifying an
external threat or opportunity.
– Strategic planning decisions shape the future nature of the
firm, its products, and its customers, and they have the
potential to alter the external environment.
whole or in part. 6
1-1 Management
• Planning
– Short-range plans, often called budgets, are sufficiently
detailed to permit preparation of budgeted financial
statements for the entity as of a future date (typically the
end of the budget period).
– These plans are prepared through a systematized process,
are highly quantified, are expressed in financial terms,
focus mainly on the organization itself by taking the
external environment as a given, and usually are prepared
for periods of a month, quarter, or year.
whole or in part. 7
1-1 Management
• Planning
– Long-range plans, or long-range budgets, typically extend
three to five years into the future. In terms of their degree
of detail and quantifiability, long-range plans are an
intermediate step between short-range plans and strategic
plans. For example, a long-range plan may culminate in a
highly summarized set of financial statements or other
quantified objectives such as targeted financial ratios (e.g.,
earnings per share) as of a date five years in the future.
– As a long-range plan is revised and refined during the early
portions of the planning period, it serves as a starting point
for successive sets of short-range plans.
whole or in part. 8
1-1 Management
• Organizing
– Organizing is the establishment of the framework within
which activities are to be performed.
– Organizing requires bringing the many functional units of
an enterprise into a coordinated structure and assigning
authority and responsibility to individuals. Organizing
efforts include motivating people to work together for the
good of the company.
– Organization usually involves the establishment of
functional divisions, departments, sections, or branches.
whole or in part. 9
1-1 Management
• Control
– Control is management’s systematic effort to achieve
objectives. Activities are continually monitored to see that
results stay within desired boundaries. Actual results of
each activity are compared with plans, and if significant
differences are noted, remedial actions may be taken.
– The control process in business always includes a human
decision maker. In addition, the information on which
control actions are based includes financial information,
and the control activity is periodic rather than continuous.
whole or in part. 10
FIGURE 1-1 Control Diagram
1-1 Management
• Authority, Responsibility, and Accountability
– Authority is the power to direct others to perform or not
perform activities. Authority is the key to the managerial
job and the basis for responsibility.
– Delegation is essential to organizational structure.
1-1 Management
• Authority, Responsibility, and Accountability
– Responsibility, or obligation, is closely related to
authority. It originates principally in the superior-
subordinate relationship in that the superior has the
authority to require specific work from others.
– Accountability—reporting results to higher authority.
1-1 Management
• The Organization Chart
– An organization chart shows an entity’s principal
management positions, helps to define authority,
responsibility, and accountability, and is essential in
developing a cost accounting system capable of reporting
the responsibilities of individuals.
– The coordinated development of a company’s organization
with the cost and budgetary system leads to an approach to
accounting and reporting called responsibility accounting.
1-1 Management
• The Organization Chart
– Most organization charts are based on the line-staff
concept. The assumption of this concept is that all positions
or functional units can be categorized into two groups: the
line, which makes decisions, and the staff, which gives
advice and performs technical functions. A line-staff
organization chart is illustrated in Figure 1-2.
– Another type of organization chart is based on the
functional-teamwork concept of management, which
emphasizes the most important functions of an enterprise:
resources, processes, and human interrelations.
FIGURE 1-2 Organization Chart Based on
Line-Staff Concept
FIGURE 1-3 Organization Chart Based on
Functional-Teamwork Concept
1-2 The Controller’s Participation in
Planning and Control
• The controller is the executive manager responsible
for the accounting function. The controller
coordinates management’s participation in planning
and controlling the attainment of objectives, in
determining the effectiveness of policies, and in
creating organizational structures and processes.
• Effective control depends on communicating
information to management. By issuing performance
reports, the controller advises other managers of
activities requiring corrective action.
1-2 The Controller’s Participation in
Planning and Control
• The principle of management by exception is a
belief that managers should be provided with
information that directs their attention to activities
that require corrective action.
• Using the accounting system and other systems, the
controller provides information for planning a
company’s future and for controlling its activities.
1-3 The Cost Department
• The cost department, under the direction of the
controller, is responsible for gathering, compiling,
and communicating information regarding a
company’s activities. This department analyzes costs
and issues performance reports and other decision-
making data to managers for use in controlling and
improving operations.
• The manufacturing departments, under the direction
of engineers and factory superintendents, design and
control production. In research and design, cost
estimates are used in deciding whether to accept,
improve, or reject a design. Likewise, scheduling,
production, and inspection are measured for
efficiency in terms of quantity, quality, costs, and, to
the extent practical, benefits.
• The personnel department interviews and selects
employees and maintains personnel records,
including wage rates. This information forms the
basis for computing payroll costs and for calculating
the labor-related costs of any activity, service, or
good produced.
• The treasury department is responsible for financial
administration of a company. In scheduling cash
requirements and expectations, it relies on budgets
and related reports from the cost department.
• The marketing department needs a quality product at
a competitive price to attract customers. Prices
generally are not set merely by adding a
predetermined percentage to cost, but costs cannot be
ignored. Marketing managers use cost data to
determine which products are profitable and to
determine sales policies, plan promotions, and
evaluate market segments. use cost data to determine
which products are profitable and to determine sales
policies, plan promotions, and evaluate market
segments.
• The public relations department has the function of
maintaining good relations between the company and
its public, especially its customers and stockholders.
Points of friction are likely to include prices, wages,
profits, and dividends. The cost department provides
information for public releases concerning these
areas.
• The legal department uses cost information as an aid
in maintaining compliance with contracts and laws.
1-4 The Role of Cost Accounting
1. Creating and executing plans and budgets
2. Establishing costing methods
3. Controlling physical quantities of inventory
4. Determining company costs and profit
5. Choosing among two or more short-run or long-run
alternatives that might alter revenues or costs.
• Budgeting
– The budget is the quantified, written expression of
management’s plans. All levels of management should be
involved in creating it. A workable budget promotes
coordination of personnel, clarification of policies, and
crystallization of plans. It also creates greater internal
harmony and unanimity of purpose among managers and
workers.
• Budgeting
– Budgeting plays an important role in influencing individual
and group behavior at all stages of the management
process, including
(1) setting goals,
(2) informing individuals about what they should contribute
to the accomplishment of the goals,
(3) motivating desirable performance,
(4) evaluating performance, and
(5) suggesting when corrective action should be taken.
• Budgeting
– The following elements have been suggested as means for
motivating personnel to aim for goals set forth in a budget.
1. A compensation system that builds and maintains a
clearly understood relationship between results and
rewards.
2. A system for performance appraisal that employees
understand with regard to their individual
effectiveness and key results, their tasks and their
responsibilities, their degree and span of influence in
decision making, as well as the time allowed to judge
their results.
• Budgeting
3. A system of communication that allows employees to
query their superiors with trust and honest
communication.
4. A system of promotion that generates and sustains
employee faith in its validity and judgment.
5. A system of employee support through coaching,
counseling, and career planning.
6. A system that considers not only company objectives,
but also employees’ skills and capacities.
• Budgeting
7. A system that does not settle for mediocrity, but
reaches for realistic and attainable standards, stressing
improvement and providing an environment in which
the concept of excellence can grow.
• Controlling Costs
– Systems designed to achieve these goals are called
responsibility accounting systems.
– Other activities, called non-value-added activities,
generally are a result of the complexity of production
settings and are not specific to the production of any
particular good or service.
• Pricing
– Management’s pricing policy ideally should assure long-
run recovery of all costs and a profit, even under adverse
conditions.
• Determining Profits
– Cost accounting is used to calculate the cost of the output
sold during a period; this and other costs are matched with
revenues to calculate profits.
• Choosing Among Alternatives
– Cost accounting provides information concerning the
different revenues and costs that might result from
alternative actions. Based on this information, management
makes short-range and long-range decisions concerning
entering new markets, developing new products,
discontinuing individual products or whole product lines,
buying versus making a necessary component of a product,
and buying versus leasing equipment.
• Choosing Among Alternatives
– In the decisions to add new products and discontinue
existing products, reliable cost information is especially
crucial to the competitive success of the firm. Misstated
costs create the possibility that undesirable business might
be initiated or continued and desirable business rejected. In
these ways, cost information plays an essential role in
identifying, evaluating, and selecting strategies for the
organization.
• Cost Accounting and Manufacturing Technology
– Factory automation, which has spread rapidly, results in
capital-intensive processes, often with computerized
systems that use robot-controlled machinery.
– Technology is changing the nature of costs, producing, for
example, lower inventory levels, less use of labor, and
increasing levels of fixed costs.

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